Italian bank shares shot up by
20% in the 10 days following the unveiling in April of Atlas, a
self-financed fund designed to backstop capital raisings and
fund bad-debt sales. Doubts remain, however, over its ability
to prevent a downward spiral, given its size relative to
Italy’s €200 billion bad-debt
pile.

Atlas will have a capitalization
of between €4 billion and €6 billion, according to
Intesa Sanpaolo, its biggest contributor alongside
UniCredit. Italy’s two biggest banks
are putting in around €1 billion each, while other banks,
insurance companies and banking foundations will put in smaller
amounts.

The immediate aim is to prevent
a domino effect if new senior-bond and depositor bail-in rules are applied in the event of
a failure of ECB-mandated capital raisings for two troubled
mutual banks: Banco Popolare di Vicenza (which is raising
€1.5 billion) and Veneto Banca (raising €1
billion). When valuations were healthier last
year, UniCredit and Intesa Sanpaolo agreed to act as
underwriters for Vicenza and Veneto, respectively, though
likely both with get-out clauses, say market sources.

Sub-underwrite

Despite hopes Vicenza will still
be able to call on some clients loyal enough to put more money
into the bank’s shares, the fund’s
first step is to sub-underwrite Vicenza’s IPO,
launched in April.

That helps UniCredit, whose share price and
additional tier-1 bonds were under pressure in the run-up to
the ECB’s end-of-April deadline for
Vicenza’s capital raising, according to Credit
Sights Veneto’s deadline is later.The fund
will in addition bring what Intesa Sanpaolo thinks could be a
structural solution to the Italian bad-debt problem.

At least 30% of the fund, on top
of anything left from bank capital recapitalizations, is
destined for junior tranches of bad-debt securitizations. Under
a scheme announced earlier this year, the government can
guarantee senior tranches.Quaestio, a little-known fund
manager with around €10 billion under management, is
launching Atlas, partly as the ECB was seen to be averse to
using firms with close ties to the investors – in
other words all the bigger Italian asset managers. Alessandro
Penati, previously a respected finance professor, is
Quaestio’s chairman and one of its main
shareholders.

Atlas is, at origin, thought to
be the brainchild of Cassa Depositi e Prestiti – and
in particular its ex-Goldman Sachs chairman, Claudio
Costamagna. CDP itself, however, will struggle to
put in more than around €500 million, for fear of
contravening EU state-aid rules. Bank of America Merrill Lynch
was called in to advise on the project in March.

Returns

Another key to maintaining the
fund’s private-sector character is that it aims to
give investors what Quaestio said would be attractive returns,
even if its targets are likely to be well below what
distressed-debt investors would seek (typically between 20% and
30%).

The Italian government welcomed Atlas with
promises of new laws to cut bad-debt recovery
times. But some say the fund is another sign of
how the authorities are leaning on healthier banks to prop up
weaker rivals. UBI Banca and Banca Popolare di Milano, for
example, will contribute €200 million and €100
million respectively, while Monte dei Paschi di Siena is only putting
in €50 million, although by assets it is bigger.

Banks now have the opportunity
to sell bad debts at higher prices than investors such as US
private equity investors could offer, potentially removing
the need for dilutive capital raisings. Banca
Carige confirmed in March that Apollo had offered to buy its
bad debt and fill a resulting capital hole by buying up most
of a €550 million capital increase. The
banks’ shareholders seem to have baulked at the
prospect.

Vicenza said Fortress has been
circling it too. Nevertheless, analysts argue
Atlas is too small to resolve Italy’s
non-performing-loan problem on its own, particularly given
the average gap between book and market value for the debt is
so large: around 10 cents on the euro, according to research
from Bernstein, even with the new securitization
framework.

On the basis of prevailing
debt-collection times, the fund should be around four times
bigger, according to Bernstein: €10 billion to
underwrite recapitalizations, and €10 billion to fund
bad-debt securitizations. Other banks, including
small mutual lenders suffering from the legacy of poor
governance will also need recapitalizing, says Fabrizio
Bernardi, banks analyst at Fidentiis.

MPS has a capital shortfall of
at least €2 billion and as much as €5.4 billion in
an adverse scenario, according to Berenberg. Banco Popolare
also has to raise €1 billion as the ECB’s
condition on its merger with Banco Popolare di Milano,
announced in March.

Temporary solution

"Atlas is not a turning point;
it’s a temporary solution of last resort," says
Bernardi.There is some hope that Atlas could make a
gain on its investments, particularly if banks like Vicenza
are able to make efficiency savings by merging. Banco
Popolare’s bookrunners will make similar
arguments during its capital raising, hopefully to avoid
relying on Atlas. Even Veneto Banca will not need to use
Atlas for its equity raising, statements from Intesa Sanpaolo
suggest.

According to a source familiar with the
fund’s thinking, with €3 billion left after
the capital raisings, Atlas could fund the junior tranche of
securitizations to allow banks to deconsolidate up to
€70 billion of bad debt covered at between 70% and
75%.

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